Pandemic’s lingering effects continue to inflate industrial real estate costs

Pandemic-related supply chain constraints, which helped drive commodities costs up, continue to have a lingering impact on overall costs and material lead times for construction of new industrial buildings.

According to Cushman & Wakefield’s North American Industrial Costs Guide, significantly higher interest rate environment in the United States and Canada has also provided additional upward pressure to costs. 

“Construction activity in the industrial sector has raced to keep up with robust demand of the last two years in North American markets. While industrial construction pipelines continue at historically high levels, the sector is facing several headwinds,” said Brian Ungles, president, project and development services at Cushman & Wakefield.

“The demand for industrial space – largely fueled by the e-commerce sector, has led to historic levels of construction, and competition for materials and labour. This along with widespread inflation, has driven construction costs higher.” 

Surveyed by Cushman & Wakefield, construction contractors expect increased challenges in project execution timelines and material lead times. The vast majority expects slight (66 percent) to significant (19 percent) increases in material lead times.

This is marginally more optimistic than sentiment from a year ago when 88 percent of general contractors expected material lead times to increase slightly (36 percent) to significantly (52 percent). While the industry may see material lead times easing, significant issues remain with electrical gear and regionally with core materials, such as cement and sand. 

The priciest markets are located in the Western U.S. and Canada. Of the top six most expensive markets, four are located on the West Coast and two are located in Canada. They are Portland; Calgary; San Diego; Seattle; Oakland; and Montreal.

The most expensive market is Portland, where costs for medium build outs average US$105 per square foot (psf) and large build outs average $98 psf. 

The most cost-effective markets include a mix of markets in Mexico and the Midwestern and southern U.S. These are Houston; Memphis; Mexico City; Guadalajara; Nashville; and Louisville.

The industrial sector has been among the winners in the wake of the pandemic. Skyrocketing e-commerce demand – along with focus on improved supply chains and increased interest in manufacturing onshore – has driven North American industrial demand over the past three years. In the U.S. alone, over 1.3 billion square feet (bsf) was absorbed between 2020 and the end of 2022.  

“New supply has not been able to keep up with industrial demand, but certainly not for lack of trying. Since the beginning of the pandemic, over 2.1 bsf of industrial space has been delivered globally with the Americas accounting for 62 percent of that,” said Ungles.

“Project costs and timelines continue to be impacted by record levels of industrial construction. Even as the pandemic’s negative impact on supply chains lessens, materials and labour challenges remain, making it difficult for developers, landlords and occupiers to complete industrial projects on time and on budget. Given recent demand, a significant slowdown in the construction pipeline is not likely anytime soon.”